Five years ago, with a view to making provisions for later in life and reducing the financial consequences in the event of disability, while at the same time providing security for his loved ones in the event of his death, Lukas took out a life insurance policy with the benefits needed to cover his goals. After his wife Valeria recently became self-employed and he reduced his working hours to be there for the children one day a week, the family decided to cut back their expenses. That’s why Lukas wanted to cancel his life insurance policy.
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Cancel your life insurance? There are better alternatives
Life is in a constant state of flux. Which means that goals, wishes and needs can change over time. That’s how it was for Lukas, who wanted to cancel his life insurance policy to save on the premiums. But what are the consequences of premature cancellation? And what alternatives are there?
Why would you want to cancel your life insurance?
There are various reasons you might not want to continue with a contract you have taken out:
- You no longer need to cover the financial consequences of disability or death
- You would like to invest the savings element of your premiums in a solution that offers higher potential returns
- You are in financial difficulties and can no longer pay the premiums
- You are in urgent need of liquid assets
If things change in your personal life or at work, it is worth looking into new retirement savings or investment products, adjusting existing solutions or perhaps even terminating contracts, depending on your current needs. This means you should review your individual retirement planning or financial situation on a regular basis.
Terminating a contract prematurely
Lukas understands that a life insurance policy is a contract for the long term and that you generally pay the agreed premium until the end of the contract term or until the time when the insured event occurs. But because he also knows that he can cancel his 3b life insurance policy at any time, he would like to look into the option of redemption.
Does premature cancellation make sense?
Early cancellation not only ends the insurance coverage and, depending on the life insurance policy, achievement of the savings goal, it also usually involves a financial loss. So before terminating a contract, ask yourself:
- Do I really no longer need the insurance benefit?
- Am I prepared to take a financial loss?
- Have I looked at all the alternatives to redemption?
Useful to know
Unlike pillar 3b, pillar 3a can only be cancelled in specific cases. You can find out more about fixed and flexible pension plans in our blog post “Pillars 3a and 3b explained: the key differences”
Calculating the redemption value
The redemption value of a life insurance policy depends on various factors – including its term. The shorter the term at the time of cancellation, the higher the deductions. These deductions include, for example, non-amortized costs for drawing up the policy or the remuneration of the advisor. To find out what the current amount is, Lukas makes an appointment with his insurance advisor.
Are the premiums lost?
In most cases, premium payments for risk insurance only to cover death or disability are “lost”. For premium payments used to build up the savings component, you’re generally entitled to the actuarial reserves – i.e. the savings element of the premiums accumulated to date and any earnings there may be. All costs arising from the redemption that have not yet been amortized are deducted from these reserves. For unit-linked life insurance policies, the current value of the fund constitutes the basis for the redemption value.
Useful to know
Early payout can have tax implications. For example, payout of a 3a life insurance policy is taxed separately from other income at a reduced rate. For one-time financed life insurance contracts, there are certain conditions that must be met to ensure that the payout or income is not subject to tax. If you have any questions, please contact your insurance provider or your tax office.
Alternatives to cancellation
Because the financial loss involved in a redemption would be quite sizeable and his family situation means that part of the insurance coverage is still needed, Lukas discusses possible alternatives with his advisor. In the “general conditions of insurance” for the insurance contract, he had already read that there are options other than premature cancellation. So they take a look at various possibilities.
You reduce insurance benefits to a minimum level that’s acceptable for you. This brings down the premium and leaves you with more money for other things.
You exclude insurance benefits you no longer need. This ensures that you are not spending money unnecessarily.
You suspend payment of premiums for one or more years. Your contract must have sufficient funds if you pursue this option. Ask your insurance provider.
You stop payment of premiums, and hence your expenses for the policy. The contract usually continues until the end of the contract term on the basis of the redemption value.
You withdraw a part of the balance saved to date. The contract continues as normal and you carry on paying premiums. The insurance amount is reduced by the amount withdrawn early.
In the end, Lukas adjusted the policy with his insurance advisor so that both the premiums and benefits are in line with the family’s current situation. Lukas is pleased with the outcome, and Valeria is too. This way, they continue to save for old age while the family is still protected.
Cancelling life insurance prematurely: what you need to know
- Premature cancellation of your life insurance almost always involves financial losses.
- If you cancel, you lose your insurance coverage. In terms of protection of your family, for example in the event of death or disability, this can have major financial consequences.
- If you terminate a contract prematurely, you will not achieve your medium to long-term savings goal.
- If you take out a new policy at a later date, the rates set will reflect your age at this point. In terms of risk benefits, state of health is also relevant.
- There are many alternatives to redemption of a life insurance policy. Make sure you look into them.
- In any event, a consultation with your advisor is always recommended. Together you will find the best solution for your current situation.